-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SqH8QsVdQW0Jzhn8o47SuHzh+XrP5KYv/tYBAdaBma7/fmKpWOIbgWIzkJqpOpKk u2W7LSmq2W4hIatqWWmJZw== 0000891554-00-000234.txt : 20000211 0000891554-00-000234.hdr.sgml : 20000211 ACCESSION NUMBER: 0000891554-00-000234 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEM INTERNATIONAL INC CENTRAL INDEX KEY: 0001016504 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133035216 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28876 FILM NUMBER: 531198 BUSINESS ADDRESS: STREET 1: 201 ROUTE 22 CITY: HILLSIDE STATE: NJ ZIP: 07205 BUSINESS PHONE: 2019260816 MAIL ADDRESS: STREET 1: 201 ROUTE 223 CITY: HILLSIDE STATE: NJ ZIP: 07205 10QSB 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ------ FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended December 31, 1999 Commission File Number 000-28876 CHEM INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 13-3035216 (State or other jurisdiction (I.R.S. Employer of organization) Identification No.) 201 Route 22 Hillside, New Jersey 07205 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (973) 926-0816 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of February 8, 2000 - ---------------------------- ---------------------------------- Common Stock, Par Value 5,178,300 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Part I: Financial Information
Item 1:Consolidated Financial Statements Consolidated Balance Sheet as of December 31, 1999 [Unaudited] . . . 1 . . . 2 Consolidated Statements of Operations for the three and six months ended December 31, 1999 and 1998 [Unaudited] . . . . . . . . . . . 3 . . . Consolidated Statement of Stockholders' Equity for the six months ended December 31, 1999 [Unaudited] . . . . . . . . . . . . . . . . 4 . . . Consolidated Statements of Cash Flows for six months ended December 31, 1999 and 1998 [Unaudited] . . . . . . . . . . . . . . . 5 . . . 6 Notes to Consolidated Financial Statements [Unaudited] . . . . . . . . 7 . . . 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 14 . . .16 Part II: Other Information . . . . . . . . . . . . . . . . . . . . . . . . 17 Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
. . . . . . CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999. [UNAUDITED] - -------------------------------------------------------------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 528,106 Accounts Receivable - Net 2,726,660 Deferred Income Taxes 231,000 Inventories 4,803,532 Prepaid Expenses and Other Current Assets 200,389 Refundable Federal Income Taxes 47,966 ----------- Total Current Assets 8,537,653 ----------- Property and Equipment - Net 1,440,263 ----------- Other Assets: Security Deposits and Other Assets 107,787 ----------- Total Assets $10,085,703 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 1 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999. [UNAUDITED] - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 3,781,252 Notes Payable 2,204,018 Accrued Expenses and Other Current Liabilities 380,952 Accrued Expenses - Related Party 100,000 Capital Lease Obligation 39,019 ------------ Total Current Liabilities 6,505,241 ------------ Non-Current Liabilities: Notes Payable 25,331 Notes Payable - Related Party 722,538 Capital Lease Obligation 10,330 ------------ Total Non-Current Liabilities 758,199 ------------ Commitments and Contingencies [9] -- ------------ Stockholders' Equity: Preferred Stock - Authorized 1,000,000 Shares, $ .002 Par Value, No Shares Issued -- Common Stock - Authorized 25,000,000 Shares, $ .002 Par Value, 5,178,300 Shares Issued and Outstanding 10,357 Additional Paid-in Capital 4,847,405 [Deficit] (2,035,499) ------------ Total Stockholders' Equity 2,822,263 ------------ Total Liabilities and Stockholders' Equity $ 10,085,703 ============ The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 2 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] - --------------------------------------------------------------------------------
Three months ended Six months ended -------------------- ------------------- December 31, December 31, -------------------- ------------------- 1999 1998 1999 1998 ----- ---- ---- ---- Sales $ 4,941,907 $ 2,839,762 $ 8,374,030 $ 5,063,494 Cost of Sales 4,164,588 2,777,609 7,181,056 4,910,204 ----------- ----------- ----------- ----------- Gross Profit 777,319 62,153 1,192,974 153,290 Selling and Administrative Expenses 766,798 1,001,359 1,507,564 1,684,299 ----------- ----------- ----------- ----------- Operating Income[Loss] 10,521 (939,206) (314,590) (1,531,009) ----------- ----------- ----------- ----------- Other [Expense] Income: Interest Expense- Related Party (18,807) (18,807) (37,614) (37,614) Interest Expense (54,342) (15,862) (71,642) (28,405) Interest and Investment Income 1,621 131 1,751 348 ----------- ----------- ----------- ----------- Total Other [Expense] (71,528) (34,538) (107,505) (65,671) ----------- ----------- ----------- ----------- [Loss] Before Income Taxes (61,007) (973,744) (422,095) (1,596,680) Federal and State Income Tax Expense [Benefit] 34,580 (15,594) 14,134 (215,779) ----------- ----------- ----------- ----------- Net [Loss] $ (95,587) $ (958,150) $ (436,229) $(1,380,901) =========== =========== =========== =========== Net [Loss] Per Common Share Basic and Diluted $ (.02) $ (.19) $ (.08) $ (.27) =========== =========== =========== =========== Average Common Shares Outstanding 5,178,300 5,178,300 5,178,300 5,178,300 =========== =========== =========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 [UNAUDITED] - --------------------------------------------------------------------------------
Common Stock Additional Total ------------------------- Preferred Paid in Accumulated Stockholders' Shares Par Value Stock Capital (Deficit) Equity ----------- ----------- ------------ ----------- ----------- ----------- Balance - July 1, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,599,270) $ 3,258,492 Net [Loss] for the six months ended December 31, 1999 -- -- -- -- (436,229) (436,229) ----------- ----------- ----------- ----------- ----------- ----------- Balance-December 31, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(2,035,499) $ 2,822,263 =========== =========== =========== =========== =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 4 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - --------------------------------------------------------------------------------
Six months ended ---------------- December 31, ------------ 1 9 9 9 1 9 9 8 ------- ------- Operating Activities: Net [Loss] $ (436,229) $(1,380,901) ----------- ----------- Adjustments to Reconcile Net [Loss] to Net Cash [Used for] Operating Activities: Depreciation and Amortization 161,682 200,961 Amortization of Discount on Note Payable 11,364 11,364 Deferred Income Taxes 13,000 (34,000) Bad Debt Expense 25,184 5,000 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable (748,624) 1,443,055 Inventories (1,324,905) (377,210) Refundable Federal Income Taxes (6,321) (196,645) Prepaid Expenses and Other Current Assets (105,601) (43,953) Security Deposits and Other Assets (850) (2,060) [Decrease] Increase in: Accounts Payable 2,626,441 (553,619) Federal and State Income Taxes Payable -- (40,000) Accrued Expenses and Other Liabilities 59,262 139,490 ----------- ----------- Total Adjustments 710,632 828,274 ----------- ----------- Net Cash Operating Activities 274,403 (552,627) ----------- ----------- Investing Activities: Purchase of Property and Equipment (63,677) (165,367) Loans to Stockholders' (3,881) (13,017) ----------- ----------- Net CashInvesting Activities (67,558) (178,384) ----------- ----------- Financing Activities: Proceeds from Notes Payable 853,766 670,000 Repayment of Notes Payable (831,545) (507,026) ----------- ----------- Net CashFinancing Activities 22,231 162,974 ----------- ----------- Net Increase/[Decrease] in Cash and Cash Equivalents 229,076 (568,037) Cash and Cash Equivalents Beginning of Periods 299,030 956,403 ----------- ----------- Cash and Cash Equivalents End of Periods $ 528,106 $ 388,366 =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 5 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - --------------------------------------------------------------------------------
Six months ended ----------------------- December 31, ----------------------- 1 9 9 9 1 9 9 8 ---------- ---------- Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $ 93,012 $ 38,913 Income Taxes $ 5,160 $ 51,047 Supplemental Schedule of Investing and Financial Activities: Note payable issued in payment of accounts payable, trade $1,500,000
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements 6 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED] - -------------------------------------------------------------------------------- [1] Business Chem International, Inc. [the "Company"] is engaged primarily in the manufacturing, marketing and sales of vitamins, nutritional supplements and herbal products. Its customers are located primarily throughout the United States and Europe. [2] Summary of Significant Accounting Policies Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated in consolidation. Basis of Reporting - The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements include all adjustments which are considered necessary in order to make the interim financial statements not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's annual report to stockholders incorporated by reference in the Company's annual report on Form 10-KSB for the fiscal year ended June 30, 1999. The results of operations for the six months ended December 31, 1999 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2000. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. Inventories - The inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Depreciation - The Company follows the general policy of depreciating the cost of property and equipment over the following estimated useful lives: Leasehold Improvements 15 Years Machinery and Equipment 7 Years Machinery and Equipment Under Capital Leases 7 Years Transportation Equipment 5 Years Machinery and equipment are depreciated using accelerated methods while leasehold improvements are amortized on a straight-line basis. Depreciation expense was $161,682 and $194,967 for the six months ended December 31, 1999 and 1998, respectively. Amortization of equipment under capital leases is included with the depreciation expense. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - The Company generally recognizes revenue upon shipment of the product. Impairment - Certain long-term assets of the Company's principal operating business subsidiary are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value which represents the projected discounted cash flows from related operations. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 1999, management expects these assets to be fully recoverable. 7 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [UNAUDITED] - -------------------------------------------------------------------------------- [2] Summary of Significant Accounting Policies (Continued) Advertising - Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $52,278 and $173,280 for the six months ended December 31, 1999 and 1998 respectively. [3] Inventories Inventories consist of the following at December 31, 1999: Raw Materials $ 2,686,758 Work-in-Process 1,312,519 Finished Goods 804,255 ------------- Total $ 4,803,532 - ----- ============= [4] Property and Equipment Property and equipment comprise the following at December 31, 1999: Leasehold Improvements $1,157,960 Machinery and Equipment 2,490,325 Machinery and Equipment Under Capital Leases 109,545 Transportation Equipment 60,569 ---------- Total 3,818,399 Less: Accumulated Depreciation and Amortization 2,378,136 ---------- Total $1,440,263 ----- ========== [5] Notes Payable Notes payable are summarized as follows at December 31, 1999:
Related Party ------------- Notes Payable Notes Payable Total ------------- ------------- ----- Notes Payable: Bio Merieux Vitek, Inc. (a) $ 42,240 $ -- $ 42,240 Chairman of the Board (b) -- 722,538 722,538 Medallion Business Credit, LLC (c) 853,776 -- 853,776 Trade Creditor (d) 1,333,333 -- 1,333,333 ---------- ------------- ---------- Totals 2,229,349 722,538 2,951,887 Less: Current Portion 2,204,018 -- 2,204,018 ---------- ---------- ---------- Noncurrent Portion $ 25,331 $ 722,538 $ 747,869 ========== ============= ==========
(a) Five year 10% equipment note dated April 1, 1997 providing for monthly payments of $1,698 for principal and interest. The note is collateralized by laboratory equipment. 8 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] - -------------------------------------------------------------------------------- [5] Notes Payable (Continued) (b) Three year non-collateralized 7% promissory note for $750,000 with related party providing for quarterly payments of $13,125 representing interest only. The note matures on March 12, 2001. As additional consideration for the loan and in the light of the below market interest rate and uncollateralized nature of the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares of common stock at an aggregate purchase price of $1.75 per share. The note is recorded net of $68,182, which represents the fair value of the Class C Warrant. The amortization at December 31, 1999 was $11,364 and is classified as interest expense in the Company's financial statements. The warrant is exercisable for a four year period commencing one year after the issuance of the note and expires on March 12, 2003. In order to complete the Company's new financing with Medallion Business credit, the maturity date of the promissory note was extended to December 31, 2001 and payment has been subordinated to Medallion Business Credit, LLC. (c) Under the terms of a revolving credit note which expires on November 5, 2001, the Company may borrow up to $1,000,000 at 3% above the prime lending rate. The loan is collateralized by the inventory, receivables and equipment of Chem International, Inc., and Chem's two operating subsidiaries, Manhattan Drug Company, Inc. and Vitamin Factory, Inc. The note has been guaranteed by the Company's principal stockholder. At December 31, 1999 the interest rate was 11.5%. (d) Secured promissory note dated November 17, 1999, providing for monthly payments of $83,333 for principal and interest on the unpaid balance. Interest is computed at the prime interest rate. The note matures on December 15, 2000 and the then unpaid principal of $416,667 becomes due. The note is collateralized by the accounts receivable, inventory and equipment of Manhattan Drug Company, Inc. and by the principal stockholder of the Company. At December 31, 1999 the interest rate was 8.5%. On January 20, 2000 the note was repaid. The loan agreement with Medallion Business Credit, LLC contains certain financial covenants relating to the maintenance of specified liquidity, and tangible net worth. The Company was not in compliance with its working capital covenant. The following are maturities of long-term debt for each of the next five years: Related Party Notes Payable Notes Payable Total ------------- ------------- ----- December 31, 2000 $2,204,018 $ -- $2,204,018 2001 18,680 722,538 741,218 2002 6,651 -- 6,651 ---------- ---------- ---------- Totals $2,229,349 $ 722,538 $2,951,887 ========== ========== ========== [6] Capital Lease The Company acquired equipment under the provision of a long-term lease. The lease expires in March 2001. The equipment under the capital lease as of December 31, 1999 had a cost of $109,545 accumulated depreciation of $52,302 with a net book value of $57,243. 9 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [UNAUDITED] - -------------------------------------------------------------------------------- [6] Capital Lease (Continued) The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at December 31, 1999 are as follows: Total Minimum Lease Payments $ 104,900 Amount Representing Interest (55,551) --------- Present Value of Net Minimum Lease Payment 49,349 Current Portion (39,019) --------- Long-Term Capital Lease Obligation $ 10,330 ========= [7] Significant Risks and Uncertainties [A] Concentrations of Credit Risk - Cash - The Company maintains balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 1999 the Company's uninsured cash balances totaled approximately $675,000. The Company does not require collateral in relation to cash credit risk. [B] Concentrations of Credit Risk - Receivables - The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company does not require collateral in relation to its trade accounts receivable credit risk. The amount of the allowance for uncollectible accounts at December 31, 1999 is $362,750. [8] Major Customer For the six months ended December 31, 1999 and 1998, approximately 57% and 40% of revenues were derived from one customer. The loss of this customer would have an adverse effect on the Company's operations. In addition, for the six months ended December 31, 1999 and 1998, an aggregate of approximately 16% and 18%, respectively, of revenues were derived from two other customers; no other customers accounted for more than 10% of consolidated sales for the six months ended December 31, 1999 and 1998. Accounts receivable from these customers comprised approximately 81% and 64% of total accounts receivable at December 31, 1999 and 1998, respectively. [9] Commitments and Contingencies [A] Leases Related Party Leases - Certain manufacturing and office facilities are leased from Gerob Realty Partnership ["Gerob"] whose partners are stockholders of the Company. The lease, which expires on June 30, 2000, provides for a minimum annual rental of $60,000 plus payment of all real estate taxes. Rent and real estate tax expense for the six months ended December 31, 1999 and 1998 on this lease was approximately $51,000 and $41,000, respectively. Unpaid rent of $100,000 due to Gerob at December 31, 1999 has been separately disclosed as accrued expenses on the consolidated balance sheet. Other warehouse and office facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is 90% owned by the Company's Chairman of the Board and principal stockholder and certain family members and 10% owned by the Company's Chief Financial Officer. The lease was effective on January 10, 1997 and provides for a minimum annual rental of $346,000 through January 10, 2002 plus increases in real estate taxes and building operating expenses. At its option, the Company has the right to renew the lease for an additional five year period. Rent expense for the six months ended December 31, 1999 and 1998 on this lease was approximately $227,000 and $230,000, respectively. 10 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [UNAUDITED] - -------------------------------------------------------------------------------- [9] Commitments and Contingencies (Continued) Other Lease Commitments - The Company leases warehouse equipment for a five year period providing for an annual rental of $15,847 and office equipment for a five year period providing for an annual rental of $8,365. The Company leases automobiles under non-cancelable operating lease agreements which expire through 2002. The minimum rental commitment for long-term non-cancelable leases is as follows: Related ------- Lease Party Lease ----- ----------- December 31, Commitment Commitment Total ---------- ---------- ----- 2000 $ 44,800 $346,000 $390,800 2001 31,915 346,000 377,915 2002 23,678 9,609 33,287 2003 -- -- -- 2004 -- -- -- Thereafter -- -- -- -------- -------- -------- Total $100,393 $701,609 $802,002 ======== ======== ======== Total rent expense, including real estate taxes and maintenance charges, was approximately $250,000 and $270,000 for the six months ended December 31, 1999 and 1998, respectively. Rent expense is stated net of sublease income of approximately $2,900 and $13,000 for the six months ended December 31, 1999 and 1998, respectively. [B] Employment Agreements - Effective July 1, 1999, the Company entered into three year employment agreements with its four executive officers which provide for aggregate annual salaries of $485,000 for the year ending June 30, 2000 and $495,000 for the years ending June 30, 2001 and 2002, respectively. These agreements are subject to annual increases equal to at least the increase in the consumer price index for the Northeastern area. [C] Investment in and Royalties Receivable from Martin Health Care products, Inc. - On February 10, 1998, the Company signed an exclusive manufacturer agreement with Martin Health Care Products, Inc. to provide to Martin Health Care certain products for a ten year period. In connection with the agreement, the Company also agreed to forgive from Martin Health Care outstanding invoices totaling $22,000. In return for the forgiveness, Martin agreed to pay to the Company a royalty on sales of certain products and to issue to the Company 15,000 shares of common stock in Martin health Care Products, Inc. The Company has recorded the cost for the common stock at $1,000 and has recorded the royalties as a non-current asset in the amount of $21,000. No royalties have been paid as of December 31, 1999. [D] Litigation - The Company is unable to predict its ultimate financial exposure with respect to its prior sale of certain products which may have contained allegedly contaminated Tryptophan which is the subject numerous lawsuits against unrelated manufacturers, distributors, suppliers, importers and retailers of that product. However, management does not presently believe the outcome of these actions will have a material adverse effect on the Company. The Company is a participant in a Class Action Lawsuit against several major bulk vitamin material suppliers. The suit seeks to recover damages resulting from price fixing charges filled against the suppliers by the United States Government. There are approximately 1,000 corporate buyers that are involved. The Company is unable to predict the ultimate financial recovery. [E] Development and Supply Agreement - On April 9, 1998, the Company signed a development and supply agreement with Herbalife International of America, Inc. ["Herbalife"] whereby the Company will develop, manufacture and supply certain nutritional products to Herbalife through December 31, 2000. 11 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [UNAUDITED] - -------------------------------------------------------------------------------- [9] Commitments and Contingencies (Continued) [F] Manufacturing Agreement - On February 14, 1998, the Company signed a manufacturing agreement with Pilon International, PLC, a company that supplies Zepter International, a world-wide direct sales distributor of consumer products. The Company will manufacture and develop dietary supplements through the year 2001. [10] Related Party Transactions During the year ended June 30, 1997, the Company entered into a consulting agreement with the brother of the Company's president on a month to month basis for $1,100 per month. The total consulting expense recorded per this verbal agreement for the six moths ended December 31, 1999 and 1998, by the Company was $6,600 and $6,600, respectively. [11] Fair Value of Financial Instruments Generally accepted accounting principles require disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. Short-term debt and long-term debt including long-term debt to a related party is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value. [12] New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities and measure them at fair value. Under certain circumstances, the gains or losses from derivatives may be offset against those from the items the derivatives hedge against. The Company will adopt SFAS No. 133 in the fiscal year ending June 30, 2001. SFAS No. 133 is not expected to have a material impact on the financial statements. [13] Equity Transactions [A] Incentive Stock Options- On December 1, 1999, the Company granted 720,000 incentive stock options for a term of ten years commencing on December 1, 1999 to its officers and employees at the exercise price of $.50 per share and 167,000 stock options at $.55 per share for a term of five years commencing on December 1, 1999. [B] Non-Statutory Stock Options- On December 1, 1999, the Company granted 120,000 non-statutory stock options to officers, directors and members of its Scientific Advisory Board at the exercise price of $.50 for a term of ten years commencing on December 1, 1999 and 583,000 non-statutory stock options at $.55 for a term of five years commencing on December 1, 1999. 12 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 [UNAUDITED] - -------------------------------------------------------------------------------- [14] Subsequent Events Litigation- On January 20, 2000, the Company entered into a settlement Agreement with a major supplier in connection with a multidistrict consolidated class action brought on behalf of direct purchasers of vitamin products, in which the plaintiffs have alleged violations of Section 1 of the Sherman Antitrust Act and other wrongful anti-competitive conduct in violation of various federal and state laws. In exchange for the Company's release and agreement to opt out of any settlement or litigation pertaining to the pending class action lawsuit and to release the supplier from any and all claims it may have concerning the pricing, selling, discounting, marketing or distributing of vitamin products, the Company received a $4.9 million cash payment. In the event that the plaintiffs in the class action receive a percentage distribution under the class settlement agreement in excess of the percentage agreed to in the Settlement Agreement, the Company will be entitled to an additional payment to increase the Company's net recovery to the same percentage as that received by the other plaintiffs in the class action suit. The Company intends to use the proceeds from the settlement to reduce its outstanding debt and to use the excess for working capital. 13 Item 2. CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following discussion should be read in conjunction with the historical information of the Company and notes thereto. Six months ended December 31, 1999 Compared to December 31, 1998 Results of Operations The Company's net losses for the six months ended December 31, 1999 and 1998 were $(436,229) and $(1,380,901). This decrease in net loss of approximately $950,000 is primarily the result of a $1,200,000 decrease in operating loss resulting from a corresponding increase in gross profit of approximately $1,000,000. The increase in gross profit is due to increased sales. Sales for the six months ended December 31, 1999 and 1998 were $8,374,030 and $5,063,494, respectively, an increase of approximately $3,300,000 or 65%. For the six months ended December 31, 1999 the Company had sales to one customer, who accounted for 57% of net sales in 1999 and 40% in 1998. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the six months ended December 31, 1999 totaled $331,611 as compared to $367,495 for the six months ended December 31, 1998, a decrease of 10%. The Company has been experiencing a decline in mail order sales due to increased competition and a decrease in advertising expenses. Sales under the Roche Vitamins, Inc. distribution agreement were $1,188,092 for the six months ended December 31, 1999 as compared to $654,777 for the six months ended December 31, 1998, an increase of $533,315 or 81%. Cost of sales increased to $7,181,056 for the six months ended December 31, 1999 as compared to $4,910,204 for the six months ended December 31, 1998. Cost of sales decreased as a percentage of sales to 86% for the six months ended December 31, 1999 from 97% for the six months ended December 31, 1998. The decrease in cost of sales is due to greater manufacturing efficiencies and higher margin sales. Selling and administrative expenses for the six months ended December 31, 1999 were $1,507,564 versus $1,684,299 for the same period a year ago. The decrease of $176,735 was primarily attributable to a decrease in goodwill expense of $275,891 due to the write off in 1998, a decrease in advertising of $121,002, an increase in office salaries of $24,179, a decrease in officers salaries of $54,960, an increase in consulting fees of $220,356 due to the hiring of an independent sales and marketing firm to help launch a new private label line. Other income [expense] was $(107,505) for the six months ended December 31, 1999 as compared to $(65,671) for the six months ended December 31, 1998. The increase of $41,834 is primarily the result of an increase in interest expense of $43,237 due to increased borrowings. Three months ended December 31, 1999 Compared to the Three months ended December 31, 1998 The Company's net losses for the three months ended December 31, 1999 and 1998 were $(95,587) and $(958,150), respectively. This decrease in net loss of approximately $(860,000) is primarily the result of an increase in operating income of $950,000 due to an increase in gross profit of approximately $715,000. Sales for the three months ended December 31, 1999 and 1998 were $4,941,907 and $2,839,762, respectively, an increase of $2,102,145 or 74%. For the three months ended December 31, 1999 the Company had sales to one customer who accounted for 54% of net sales in 1999 and 36% in 1998. 14 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Results of Operations - Continued Retail and mail order sales for the three months ended December 31, 1999 totaled $155,200 as compared to $169,376 for the three months ended December 31, 1998, a decrease of $14,176 or 8% due to increased competition. Sales under the Roche Vitamins, Inc. distribution agreement totaled $600,581 for the three months ended December 31, 1999 as compared to $344,756 for the three months ended December 31, 1998, an increase of $255,825 or 74%. Cost of sales increased to $4,164,588 for the three months ended December 31, 1999 as compared to $2,777,609 for the three months ended December 31, 1998. Cost of sales decreased as a percentage of sales to 84% as compared to 98% for the three months ended December 31, 1998. The decrease in cost of sales is due to greater manufacturing efficiencies and higher margin sales. Selling and administrative expenses for the three months ended December 31, 1999 were $766,798 as compared to $1,001,359 for the three months ended December 31, 1998. The decrease of $234,561 was primarily attributable to a decrease in goodwill expense of $275,891 due to the write off in 1998, a decrease in advertising of $69,044, a decrease in officer salaries of $72,661, an increase in consulting fees of $125,402. Other income [expense] was $(71,528) for the three months ended December 31, 1999 as compared to $(34,538) for the three months ended December 31, 1998. The increase of $36,990 is primarily the result of an increase in interest expense of $38,480 due to increased borrowings. Liquidity and Capital Resources At December 31, 1999 the Company's working capital was $1,965,412, a decrease of $532,049 over working capital at June 30, 1999. Cash and cash equivalents were $528,106 at December 31, 1999, an increase of $229,076 from June 30, 1999. The Company generated $274,403 and utilized $552,627 for operations for the six months ended December 31, 1999 and 1998, respectively. The primary reasons for the cash generated from operations for the six months ended December 31, 1999 are an increase in inventories of approximately $1,300,000 and an increase in accounts payable of approximately $2,600,000. The Company believes that the anticipated sales for the third and fourth quarters of fiscal 2000 and the litigation settlement of $4.9 million will meet the cash needs for operations. The Company utilized $67,558 and $178,384 in investing activities for the six months ended December 31, 1999 and 1998, respectively. The Company generated net cash of $22,231 and $162,974 from debt financing activities and the six months ended December 31, 1999 and 1998, respectively. The Company has a $1,000,000 revolving line of credit agreement which bears interest at 3.0% above the prime interest rate and expires on November 5, 2001. At December 31, 1999 the balance due under the revolving line of credit was $853,776. On January 20, 2000 the Company entered into a Settlement Agreement with a major supplier in connection with a multidistrict consolidated class action. In exchange for the Company's release and agreement to opt out of any settlement or litigation pertaining to the pending class action lawsuit, the Company agreed to a settlement of 4.9 million dollars. The settlement proceeds were offset by $1,333,333, the amount due under a secured promissory note dated November 17, 1999. [See Note 5D]. 15 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Liquidity and Capital Resources - Continued The Company's total annual commitment at December 31, 1999 for the next five years of $1,394,701 consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment and automobiles. Effective July 1, 1999, the Company entered into three year employment agreements with four executive officers which provide for aggregate annual salaries of $485,000 for the year ending June 30, 2000 and $495,000 for the years ending June 30, 2001 and 2002. Recent Developments On September 23, 1999 the Company was notified by the Nasdaq SmallCap Market that its shares of common stock had failed to maintain a minimum bid price of greater than or equal to $1.00 per share over the last thirty consecutive trading days, as required under Marketplace Rule 4310(c)(4). The Company had ninety (90) calendar days, or until December 23, 1999 to regain compliance with this Rule. On December 21, 1999 the Company requested an oral hearing to determine its continued listing on the Nasdaq Small Cap Market because it failed to maintain a minimum bid price of greater than or equal to $1.00 per share. The Company was advised on December 28, 1999 that in anticipation of an oral hearing to be held on February 3, 2000 the delisting action referred to the September 23, 1999 letter was stayed. On January 18, 2000, the bid price of the Company's common stock closed above the $1.00 minimum and has subsequently maintained the $1.00 minimum since that date. On January 27, 2000, Nasdaq informed the Company that it was not in compliance with the independent directors and audit committee requirements. The Company responded informing Nasdaq of the appointment of an additional independent director on December 1, 1999 and that it was in compliance with the requirements. The Company attended the hearing on February 3, 2000 and presented its oral arguments for its continued listing on the Nasdaq SmallCap Market. The hearing committee advised the Company that the committee's decision would take approximately two weeks. 16 Part II: Other Information CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- Item 1: Legal Proceeding None Item 2: Changes in Securities None Item 3: Defaults Upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8K None 17 SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHEM INTERNATIONAL, INC. Date: February 8, 2000 By:/s/ Seymour Flug ------------------------------------- Seymour Flug, President and Chief Executive Officer Date: February 8, 2000 By:/s/ Eric Friedman ------------------------------------- Eric Friedman, Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----